United States General Accounting Office Report to the Honorable GAO John McCain, U.S. Senate June 1998 AIRLINE COMPETITION Cargo Airline Has Enhanced Competition in Hawaii but Faces an Uncertain Future GAO/RCED-98-156 United States General Accounting Office GAO Washington, D.C. 20548 Resources, Community, and Economic Development Division B-277484 June 18, 1998 The Honorable John McCain United States Senate Dear Senator McCain: The transport of cargo throughout Hawaii is greatly affected by the state’s unique geography. Because Hawaii comprises eight major islands remote from the U.S. mainland, many cargo customers must rely on air service as the only way to transport their goods in a timely fashion. Historically, two airlines—Aloha Airlines and Hawaiian Airlines—have provided service to meet this need. Under an exemption from provisions of the Airport Noise and Capacity Act, these two airlines are permitted to operate an interisland “turnaround” service (i.e., flights within Hawaii) with relatively noisy “Stage 2” aircraft, which are being phased out on the mainland.1 Specifically, airlines that were providing turnaround service with Stage 2 aircraft when the act was passed in November 1990 are allowed to continue to do so. In May 1995, the Federal Aviation Administration (FAA) determined that American International Cargo (AIC)2 also qualified on the basis of its November 1990 operations, in which it provided what FAA deemed turnaround service in Hawaii—and “onward” service to the U.S. mainland—with a McDonnell-Douglas DC-8 Stage 2 aircraft. In November 1995, this airline began to conduct scheduled interisland cargo service consistent with FAA’s decision. Shortly thereafter, in a reinterpretation of its 1995 decision, FAA concluded that AIC did not qualify to continue providing such service. FAA’s revised interpretation required AIC either to begin operating quieter, Stage 3, aircraft on interisland routes or to exit these markets entirely. Converting an aircraft for Stage 3 operations typically costs an airline $1.5 million per engine. Legislation enacted in October 1996 allowed AIC to continue serving Hawaii’s interisland markets with one Stage 2 aircraft through September 30, 1998. To help prepare the Congress to reexamine the issue as the deadline approaches, you asked us to determine on what basis FAA revised its interpretation of turnaround 1Under 49 U.S.C. 44715, the Federal Aviation Administration has issued regulations defining three classes of aircraft in terms of their noise levels. Aircraft certified before 1969 that do not meet the noise standards issued in that year are classified as Stage 1 aircraft (e.g., early model Boeing 707s and McDonnell-Douglas DC-8s). Aircraft meeting the 1969 standards (e.g., most Boeing 727s and DC-9s) are known as Stage 2 aircraft. Aircraft complying with more stringent standards issued in 1977 (e.g., Boeing 757s and MD-80s) are classified as Stage 3 aircraft. 2AIC is a subsidiary of American International Airways (AIA), based in Ypsilanti, Michigan. In August 1997, Kitty Hawk, Inc., of Dallas, Texas, purchased AIA and its subsidiaries, including AIC. Page 1 GAO/RCED-98-156 Airline Competition B-277484 service. You also asked us to determine how AIC’s November 1995 entry has affected—and how its potential future exit could affect—competition in Hawaii’s air cargo markets. In May 1995, FAA determined that one segment of a flight American Results in Brief International Cargo had been operating in November 1990 with a single Stage 2 aircraft included a takeoff and a landing in Hawaii and that it therefore qualified as interisland turnaround service. Consequently, FAA concluded that, under the Airport Noise and Capacity Act, American International Cargo could legally initiate scheduled interisland service using its single Stage 2 aircraft. However, after a formal inquiry from Aloha Airlines and a broader assessment of the legislation’s intent, FAA revised its interpretation of turnaround service. This revised decision held that the flight American International Cargo was operating in November 1990 did not constitute turnaround service because it included points outside Hawaii. Our review of relevant legislation and the legislative history found FAA’s revised interpretation to be legally sound. In particular, the flight that American International Cargo conducted at the time the federal noise legislation was passed does not qualify as turnaround service—defined in a 1991 amendment as consisting of the operation of a flight between “two or more points, all of which are within the state of Hawaii”—and therefore does not render the airline exempt from statutory noise requirements. American International Cargo’s November 1995 entry into Hawaii’s interisland markets has enhanced competition markedly by providing new services to a variety of customers. For instance, since that date, American International Cargo has offered scheduled daytime flights using large cargo containers—a service that its competitors do not offer. This service has facilitated the delivery of time-sensitive “express” cargo and has helped to create new mainland markets for some of Hawaii’s agricultural producers, who previously had to rely on ocean transportation. In addition, although the airlines and their customers could not provide us with sufficient data to determine American International Cargo’s overall impact on rates, anecdotal information indicates that the company has introduced some price competition into interisland markets. Consequently, while there could be a discernible effect on the breadth of services provided if American International Cargo exits Hawaii’s interisland markets after September 30, 1998, the extent to which rates might increase remains unclear. American International Cargo told us that it wishes to continue serving Hawaii’s interisland markets after this date. However, absent federal legislation extending American International Page 2 GAO/RCED-98-156 Airline Competition B-277484 Cargo’s right to use Stage 2 aircraft, the airline will need to use Stage 3 aircraft to remain in these markets. As a grouping of eight major islands located near the center of the Pacific Background Ocean, Hawaii has a geography that bears significantly on the manner in which goods and people can move throughout the state. In addition, Hawaii’s relative lack of industry means that most finished goods must be imported from the mainland. Unlike much of the mainland—where transport relies on air, sea, rail, and highway—Hawaii must rely primarily on the first two means. For cargo customers, air shipment is the faster and more expensive option, and sea transport is the slower but less expensive option. Most cargo for which the speed of delivery is not critical moves by sea, both among the islands and between Hawaii and the mainland. However, other goods—particularly, perishable produce, mail, and time-sensitive items—move by air. The bulk of interisland cargo shipments moves among four islands—Oahu, Maui, Kauai, and the “Big Island” of Hawaii. Honolulu, Oahu’s urban center, is the largest city in the islands and the center of the state’s economic activity. Its airport, Honolulu International, is by far the busiest in the state. The island of Hawaii, the state’s second most populous, has two key airports, at Kona and Hilo, which serve distinct economic regions. The airport at Kona supports an active tourism trade and offers direct flights to the mainland. By contrast, the airport at Hilo supports no direct flights to the mainland but serves as a key distribution point for tropical plants and flowers, the cultivation of which is becoming increasingly important to Hawaii’s economy. The islands of Maui and Kauai also support scheduled commercial jet service. Figure 1 shows the major Hawaiian islands, their key communities, and their scheduled air cargo service; table 1 summarizes key operating statistics for Hawaii’s airports. Page 3 GAO/RCED-98-156 Airline Competition B-277484 Figure 1: Hawaii’s Major Islands, Commercial Airports, and Scheduled Air Cargo Service Kauai Lihue Oahu Honolulu Molokai Kahului Lanai Maui Hilo Kona Hawaii Legend AIC Aloha Airlines Hawaiian Airlines Honolulu to Kahului, Maui Honolulu to Kahului, Maui and return Honolulu to Kahului, Maui and return Kahului, Maui to Kona, Hawaii Kona, Hawaii and return Kona, Hawaii and return Kona, Hawaii to Hilo, Hawaii Hilo, Hawaii and return Hilo, Hawaii and return Hilo, Hawaii, to Honolulu Lihue, Kauai and return Lihue, Kauai and return Lanai City, Lanai and return Lanai City, Lanai and return Hoolehua, Molokai and return Source: GAO’s analysis of data from AIC, Aloha Airlines, and Hawaiian Airlines. Page 4 GAO/RCED-98-156 Airline Competition B-277484 Table 1: Aircraft Departures, Number of Passengers, and Cargo Volume for Aircraft Number of Volume of cargo Major Hawaii Airports, 1997 Airport (Island) departures passengers (in tons)a Honolulu (Oahu) 82,438 8,938,773 219,840 Kahului (Maui) 29,474 2,548,939 18,500 Kona (Hawaii) 15,872 1,204,260 11,490 Hilo (Hawaii) 11,847 779,302 18,634 Lihue (Kauai) 16,250 1,186,391 4,774 aVolume includes cargo shipped among Hawaii’s islands, as well as to destinations outside the state. Source: DOT. Prior to AIC’s November 1995 entry into scheduled interisland service,3 Aloha Airlines and Hawaiian Airlines were the chief providers of air cargo transport throughout the state. Aloha began its service to Hawaii’s “outerisland” residential and commercial centers in 1946. In addition to over 180 daily jet flights among Oahu, Maui, Kauai, and the Big Island of Hawaii, Aloha operates a nighttime cargo service using some passenger aircraft with the seats removed. Aloha also operates an “Aloha Island Air” service using small propeller-driven aircraft to reach remote rural areas. Hawaiian Airlines, for its part, has provided air service among the islands since 1929. Hawaiian’s cargo service is conducted in conjunction with its passenger service; all cargo is carried below deck on more than 150 daily flights among the state’s major communities.